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a ceo decides to change an accounting method at the end of the current year. the change results in reported profits increasing by 5% but the company's cash flows are not changing. if capital markets are
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a ceo decides to change an accounting method at the end of the current year. the change results in reported profits increasing by 5% but the company's cash flows are not changing. if capital markets are efficient, then the stock price will:

User Stackmate
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1 Answer

20 votes
20 votes

Answer:

The stock price will not be affected by the accounting change.

Step-by-step explanation:

Since it is assumed that the capital markets are efficient, the stock's market price is expected to reflect all available and relevant information. This implies that all the necessary information is already incorporated into the stock price. The CEO cannot deceive the market through this change in accounting method. Therefore, the stock price will not be undervalued or overvalued. Moreover, the change in accounting method only shifts the timing for reporting income.

User Sarp Kaya
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